How to Review and Rebalance Your Portfolio

0:04It will soon be time to review and perhaps rebalance your portfolio. But how should you do it? That and more on this Saturday personal finance edition of Motley Fool Money.

0:18I'm Robert Brokamp and this week I speak with financial planner Sean Gates about how to evaluate and perhaps adjust your portfolio as we prepare to enter a new year. But first, let's highlight some insights from some recent publications. You know, it's the time of year when many financial services firms issued their 2026 outlooks. Many are available, and I find them all interesting, but I'll just highlight a few takeaways from the recent publication of Schwab's Outlook for Stocks and the Economy, co-written by Lizanne Saunders and Kevin Gordon. One of the themes of the report is the ongoing K-shaped economy, so-called because of the divergence in fortunes between higher-income Americans, who are doing pretty well, and lower-income Americans, who are struggling due to affordability challenges and job uncertainty.

0:59The economy next year will continue to be in what Schwab calls a vibe-pression, a dour consumer sentiment while GDP continues to grow. To illustrate this, the report cited an unprecedented divide between increasing unemployment expectations per the University of Michigan's Consumer Sentiment Survey, which tends to survey more working-class respondents with, you know, kitchen table concerns, and the unusually upbeat outlook for the stock market from the Conference Board Consumer Confidence Survey, which tends to have more higher-income respondents. As the report stated, quote, the result is a split personality and confidence, textbook K, end of quote.

1:36One reason the economy may continue to grow despite this vibe-pression is the stimulus from the One Big Beautiful Bill passed in July, which is projected to add 0.7 % to GDP in 2026 and close to that in 2027, but at the cost of accelerating borrowing from Uncle Sam. The Schwab Report estimates that the percentage of federal debt to GDP will rise to more than 125 % over the next decade, whereas it would have been just, and I put that just in air quotes, a bit over 115 % without the bill. One other tidbit from the Schwab Report, the second year of a presidential term is usually the weakest for the stock market.

2:13Since 1928, the second year is profitable 54 % of the time, compared to an average of 67 % for all four years, with an average return of 3.3%. For our next item, we'll continue on the theme of inflation with a recent MarketWatch article from Alicia Munel of the Center for Retirement Research at Boston College. According to Munel, prices have risen 25 % in total over the past five years. However, the three biggest items in most household budgets, housing, transportation, and food, have risen more. Incomes, meanwhile, have risen 27%. So while wages may have been keeping up with overall prices, Minow writes that, quote, standing still is not enough.

2:54Most would like to see their standard of living improve over a five-year span. Thus, they feel like they're falling behind. End of quote. And now the number of the week, which is 67.8. That was the average age of death of Boeing employees who retired at age 65, whereas employees who retired at age 55 lived to 83. In other words, retire sooner, live longer. There's only one problem. It's not true. These stats come from a graphic that has been passed around the Internet for a long time, including recently, but it was debunked more than 20 years ago. Retirement expert Michael Finca recently wrote an article about it for the website ThinkAdvisor, and with the help of fellow researcher David Blanchett, looked at the actual relationship between retirement and life expectancy.

3:42Using the University of Michigan's Health and Retirement Study, they looked at the retirement status of participants in 2012 and what percentage were still alive a decade later. However, it's important to take health into account because many people retire sooner due to health issues, which can also result in them dying sooner. So Finca and Blanchett also factored in the participant's self-assessed health status, which is actually a surprisingly good predictor of how long people will live. The results were the complete opposite of that made-up graphic about Boeing employees. Finka and Blanchett found that people who continue working lived longer than those of the same age who had retired.

4:18The difference was the largest for those in fair or poor health, but even workers in great health were more likely to live longer than healthy retirees. Next up, how to analyze the health of your portfolio when Motley Fool Money continues. I'm Kyle Wood, host of Fun Facts Daily. We all know the Winter Olympics have thrilling competitions, but the history of the sports is more odd and interesting than you might realize. Like archaeologists have found skis that are over 8 ,000 years old, meaning that people in Russia and Scandinavia were skiing before the Great Pyramids were built in Egypt. Fun Facts Daily is covering all the stuff you never realized you always wanted to know about the Winter Olympics and hundreds of other topics.

4:59So follow Fun Facts Daily wherever you get your podcasts. It's almost 2026 and soon you'll be receiving your year-end statements from all your investment accounts. You'll also hear a lot of advice about reviewing and rebalancing your portfolio in January. But how should you do it and how much rearranging is actually necessary? Here to give his take is certified financial planner, Sean Gates. Welcome back to the show, Sean. Hello. This is an easy podcast. Just put everything in gold and go away for a while. Well, we make good to that. So, you know, you and I have been friends and colleagues for over a decade.

5:35So I know you're a successful investor yourself, right? You're a fellow in your 40s, you're financial independent, you only work because you want to, not because you have to, but you've also been in the financial service industry for almost 20 years. So how do you go about reviewing portfolios for yourself and for your clients? Yeah, this is a fun topic. It's tricky because you get investors of all walks of life who don't really know what they're trying to accomplish. And I would say that's the foundation of rebalancing, right? What is your target allocation? Because if you don't have a target, you don't know what to rebalance towards.

6:09The target allocation is usually a function in the old school world. We'd call it the investment policy statement. But really, it's just a document or a guiding ethos on where you want to go. So a financial plan could be a decent investment policy statement. And it's to say a combination of what is your risk capacity and risk tolerance and back into that target allocation. Is it 60-40 like a traditional mix, 100 % equity, all cash? Those are how you would back into your target allocation. And then you get into the rebalancing effort. Well, you talk about risk tolerance. We are at a point now where the market is at all-time high.

6:49The market has done very well over the last five or 10 years. There have certainly been some speed bumps, but I think people are feeling pretty good about portfolios. Do you take that into consideration when you talk to a client and you're like, maybe you should dial it back? You may feel pretty good right now, but you may be feeling good because the market is doing low. Yes. I would say, you know, valuations is something to consider when you're thinking about rebalancing, right? If we take a step back on the overall rebalancing process, right? There's typically two ways to do it. One based on time and one based on certain measurable metrics, usually a percentage drift, but it could also be one of valuations.

7:29It could also be one of overall market sentiment, like Fed cutting interest rates, like unique market events. And so I do think you should take those into consideration, but you have to go through a lot of education for someone to help guide them on where their rebalancing or target allocation should be. One chart that I think you and I are very fond of, I know me and Megan are very fond of, is the quilt chart. So the quilt chart is a very common chart that shows which asset classes have done the best on a year-by-year basis stacked over one another. So you could look at 2024 and see that gold did very well that year, up 20%, but then bonds were negative 5%.

8:07And a well-diversified portfolio is usually going to fit somewhere in the middle of that quilt chart. And that ties back to the risk tolerance, right? Or as an investor, do you want that sort of smooth return profile with less magnitude of drawdown or less volatility? Or do you want to target some of those asset classes that can give you a juiced rate of return, but higher amount of volatility? And then you could always tie that to your point around certain market events, certain valuations. Maybe you're paring back the aggressive stuff when valuations get high. And you could incorporate that in your yearly rebalancing or semi-annual rebalancing conversation.

8:47You mentioned Megan. I'll just clarify that Megan is one of our colleagues at Molly Fool Wealth Management who was our guest on last week's episode. We had a great discussion about Roth's advice gone wrong. So make sure you listen to that. Yeah. And that quilt I think is always instructive because I call out asset allocation sort of like the hokey pokey. Whereas one year, one type of investment is in and the next year it's out. Whereas a well-diversified portfolio just kind of rides along in the middle. It's never the number one, it's never the bottom, but it's a nice smooth ride. Yeah. And I think that's important because, especially from a foolish philosophy perspective, right?

9:24You can almost rob yourself of this concept of asset allocation because a lot of foolish investors are diving into individual stocks. So I know several folks that I've run into who have upwards of 50 % of their portfolio in a single stock, right? I know some people who have 100 % in Apple and they've had that for a decade and that serve them very well. And so you have to kind of attune what does rebalancing mean for that person? Because if you looked at a quilt chart for Apple, it's like, how do you proxy that against broad asset classes? And so it's just a really interesting conversation on how you evolve your rebalancing process.

10:03As people begin to receive their year-end statements, there's always, you know, how their portfolio or that specific account performed. And there's usually a benchmark in there somewhere. It might be the S &P 500. It might be some MSCI index. And it always occurs to me that in many ways, those benchmarks aren't appropriate, right? This portfolio may have cash and bonds and international stocks. Why are you comparing it to the S &P 500? Do you think benchmarking is all that important to compare yourself relative to some index? Or is it more important just to make sure you have enough money to accomplish your financial goals?

10:38I would say it's a little bit of both. I would say the most important thing is, are you achieving the rate of return for the level of volatility that you're comfortable with towards your goal achievement? That's going to be the most important thing and should be the North Star for most people. At the same time, if you're investing, you have to have some measurable guide on the underlying performance of the component parts, right? And so then benchmarks become relevant. If you're in, you know, a target date fund in your 401k, and that target date fund is a stinker compared to all other target date funds.

11:14That matters on a micro level, and you should be able to adjust with that informed decision. But to your point, most people have gotten accustomed to benchmarking everything against the S &P 500. And that gets really dangerous because people are getting over their ski tips in terms of risk taking because everyone thinks you can just put everything in the S &P 500, look, it's done 10 % every year. And that's not appropriate for your level of risk or your goal set, right? And a lot of people are better off if they ride that smooth, middle of the road quilt chart, because they might make bad investor decisions on their wealth if they see volatility in the future.

11:56Particularly at this time, I think it's challenging to benchmark your portfolio against the S &P 500, because it has basically been the asset class of choice over the last 5, 10 years, right? US large cap stocks have outperformed just about everything. So if you had international, if you had small caps, if you had value, and of course, if you had cash and bonds, that was a drag on your portfolio, but that doesn't mean it was inappropriate for your situation. So I think that's important context because if you do benchmark to the S &P 500, you're probably going to not look so great if you had a well-diversified portfolio, but it still might've been the right choice for you.

12:32Correct, yeah. And it gets very tricky, especially if you are paying someone to manage your money because you can blame them for not competing against the S &P 500. And then you get in this place where a version of rebalancing that you do is shopping money managers. So you fire one money manager who has failed to meet their benchmark and you go put it with someone else. And it's a version of chasing performance and you can trap yourself in that way. I would argue that the S &P 500, while it's done very well, if you look at this year, international stocks have crushed it and gold has crushed it.

13:11So finally, we are starting to see where people who have just hitched their wagon to the S &P 500 are finally recognizing that other asset classes can help their portfolio. Is this a unicorn year, an outlier for one year? Perhaps. But again, it just shows you in that quilt chart or stacked ranking asset class visual that sometimes you have to have other component parts to power your portfolio. You mentioned having a stinker of a target date fund. So let's move on to how you look at your individual investments and decide whether to keep them or not. Obviously, with any form of mutual fund or ETF, you want to benchmark it against others within that category.

13:53You want to do the apples to apples comparison. Ideally, over three to five years, maybe longer, just to make sure that you are outperforming that category or not. You probably should just go with an index version. But how else do you look at all your investments, your funds, your stocks, your things like that? You go line by line? Yeah. I mean, I think it depends on the construction of your portfolio. So if you take the buy and hold index investor, if you go line by line, you might only have four investments, right? You might have VOO, BND. So there you could go line by line, but you really don't have to worry about comparisons because you're just getting the index rate of return.

14:31If like traditional Motley Fool investors, you're trying to outperform, you're seeking outperformance with skilled stock selection, then to your point, yes, I think, you know, a typical three to five year evaluation of those underlying money managers. And if you have individual stocks, you give leeway to those individual stocks to work for you, right? So again, this client who had 100 % of their portfolio in Apple, certain years, if Apple underperforms, you could be inclined to rebalance out of Apple, but you give leeway or a leash to Apple to recover and do well. And so those would be the types of things that you would look for.

15:10You would also take into context the asset location. So if you have certain positions in a taxable account, you might be more inclined to let those work for you or strategically harvest losers or winners, tax loss harvesting or tax gain harvesting. And then you might have a different rebalancing structure in a tax deferred account or a tax free account because you can let winners run in those accounts for longer, or you can purposely sell big winners over a short period of time because there's no tax implications. That's another way to do things. Let's move a little bit more into rebalancing. You mentioned that there are a few ways to do it.

15:45Some people do it annually, once a year, Some people do it as a target. If a certain allocation has moved five percentage points one way or the other, do you think it's important to do it every year? Or is it one of those things that you could probably get away with doing it every two to three years and be okay? I think my view on this has changed over time. I am comfortable letting it ride longer. I have grown an affinity to the foolish philosophy of watering your flowers, not your weeds. And so from that perspective, things that are doing well tend to do well. There's a bit of momentum there.

16:20And so if you said every two years, I'm going to rebalance, I think that's perfectly fine. You can go through the mental exercise of evaluating things on a shorter time frame, but you don't have to do anything, right? There's no forced mechanism of rebalancing. But you could say every six months, we're going to review how things are doing. If certain elements of my portfolio are doing very well, I don't have to do this at a six month regimen. I'm just checking in with it. And then we'll do it again in the next six months. And you actually pull the trigger when you feel comfortable. And then again, timing isn't the only component, right?

16:52So if you have an outsized position, if something has grown to a very large position, that should be a determinant. And again, it's always tied back to your level of volatility adherence. But if something gets to like a 20 % weight of your overall portfolio, and everyone kind of has different measures of what that percentage allocation should be, that's probably a good time regardless of if you have a two-year rebalance evaluation or a six-month evaluation you should probably consider rebalancing when something gets too big in your portfolio i'll just point out there's some simple ways to just do rebalancing on the edges with cash flow right if you're still saving for retirement all your contributions to your 401ks and iras go into the underweighted assets if you're retired and you need to sell a little bit every year to pay your bills.

17:38You sell your overweighted assets. If you do have an overweighted position and you're reinvesting the dividends, you can just stop reinvesting the dividends. You probably shouldn't be building up and then you use that cash to buy something that you need a little bit more of. Any other tips and tricks involved in rebalancing your portfolio? Yeah. I mean, I think the thing I would mention is just that in financial planning world, there's always this notion of what is the investor rate of return, right? Because you can quote the S &P 500 and say it gets 10 % per year, but the actual investor in the S &P 500 never achieves that rate of return because they're tinkering with their portfolio too much.

18:16Hence me saying I'm actually cool with a slower rebalancing process because by and large, the people who just don't mess with their account very much tend to do better than the people who are over tinkering with their portfolio. The only caveat that I will mention with respect to that is when you're constructing your portfolio or your target allocation to rebalance around, it helps to have a conservative portion of any kind, even cash, to temper bad behavior. So April is a great example where I was fielding calls this year in April from large accounts who went all to cash, right? And this has happened to me many times, right?

19:00And my job in that moment is to convince them not to do it. Say I have a 50 % success rate, right? So some people I'll talk off the ledge and some people I won't. The people I can talk off the ledge better is usually someone who has a conservative element in their portfolio that I can say, hey, let's use this moment in time to make a positive action, a temporary moment of rebalance where we say you're 50-50 stocks and bonds. Let's sell some of the bonds, lower your bond allocation and buy into the madness, that gives them something to do in that moment of pain and avoided the worst outcome. It's hard to quantify the worst outcome.

19:41Nobody cares about the person who didn't sell to cash in a panic because no one reports it. That's a very critical component. You should always have some amount of conservatism in your portfolio to make a positive movement. Well, this has been great, Sean. Thanks so much for joining us. Hey, everybody, it's Leo Laporte. I hope you'll join me and Steve Gibson every Tuesday for Security Now. This week, we talk about an antivirus program that infects its own users. That's not good. The Notepad++ hack, that's really not good. And how MongoDB has lowered the hacking skill level bar to the floor. It's just too easy to hack.

20:20Every week, Steve Gibson tells you everything you need to know about security on Security Now. You'll find it at twit.tv slash sn or wherever you get your podcasts. It's time to get done, fools, and I'll just highlight a couple of year-end financial planning tips that I haven't mentioned in previous episodes, starting with spending money in a flexible spending account that can't be rolled over to next year. If you're saving for college, there's no deadline for contributions to 529 accounts, but many states allow residents to deduct contributions on the state income tax return, and to take advantage of that, the contribution generally must be made by December 31st.

20:59If you have a 529 and a kid in college, take money out to reimburse yourself for qualified 2025 expenses because withdrawals have to be made in the calendar year the expenses were incurred. And the list of qualified expenses is pretty long, including textbooks, equipment, technology, food, dorms, off-campus housing, and school loans up to a limit. And if you have unused money in a 529, it can be transferred to a Roth IRA for the beneficiary if you qualify. And there are a lot of qualifications, so make sure you research the rules. And that is the show. I wish you all a very Merry Christmas. And if you're looking for an eclectic and offbeat holiday music playlist, check out my Bro Ho Ho playlist on Spotify.

21:40Thank you as always to Bart Shannon, the engineer, for this episode. People on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. While personal finance content follows Motley Fool editorial standards and is not approved by advertisers, advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.